Trends in the Defense Industrial Base

Office of the Deputy Assistant Secretary of DefenseManufacturing and Industrial Base Policy

March 29th, 2017

Importance of the defense industrial base

“…Our margin of technological superiority is slowly eroding, and addressing this issueis one of our most important strategic tasks, because too great an erosion of ourtechnological superiority would ultimately undermine our conventional deterrence,raise a competitor’s incentives for preemption, contribute to crisis instability, andgreatly raise the potential cost of any future U.S. military operation.”- Deputy Secretary of Defense, Bob Work

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The defense industrial base is an integral part of our force structure and underpins our technical dominance

Mission and location of the Office of Manufacturing and Industrial Base Policy (MIBP)

Advanced Manufacturing

Capabilities

Global Markets & Investments

Secretary of Defense

Under Secretary of Defense(Acquisition, Technology, & Logistics)

Deputy Assistant Secretary of Defense(Manufacturing & Industrial Base Policy)

Industrial Base Assessments

Policy & Industry OutreachBusiness Intelligence & Analytics

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Ensure robust, secure, resilient, and innovative industrial capabilities upon which the Department of Defense can rely to fulfill the

Warfighter’s current and future requirements

The defense industrial base is a key part of DoD force structure, but faces challenges

There are positive trends in the DIB…

• Profitability high

• Emerging “Reshoring”

• Spirited competition

• Innovation focus

• New DIB and workforce entrants

…But significant challenges exist

• Defense research & development (R&D) lags

• Fragile industrial base sectors

• Maintaining competition

• Concerning foreign investment trends

• Maintaining workforce

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Sector/Index Total Returns1Y 5Y 10Y

Dow Jones Index 27% 63% 70%Aerospace 44% 102% 121%Defense 65% 189% 181%Industrials 30% 84% 91%Technology 51% 106% 149%Utilities 7% 45% 34%Oil & Gas 9% -13% 14%

Returns as of the end of trading on March 20, 2017Market data accessed via Thomson Reuters Eikon

The A&D sector has outperformed other sectors

0

50

100

150

200

250

300

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Inde

x Va

lue

Reba

sed

(Mar

ch 2

0, 2

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=0)

A&D Performance Relative to the Broader Dow Jones Index and Other Sector Indices

Defense

Technology

Aerospace

Industrials

Dow Jones Index

Utilities

Oil & Gas

5

0%

2%

4%

6%

8%

10%

12%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

R&D Expense as % of SalesTechnology* Communications*Basic Materials* Industrial*S&P500 System IntegratorsMajor Subsystems Suppliers Significant Component SuppliersAdjusted System Integrators * Denotes subsector of the S&P500

A&D margins are healthy butR&D spending has lagged

Big 6 System Integrators

e.g. Lockheed Martin and Northrop Grumman

Major Subsystems Suppliers

e.g. Aerojet Rocketdyne and General Electric

Significant Component Suppliers

e.g. AeroVironment and Digital Globe

Pure Play Services Providers

e.g. AECOM and Booz Allen Hamilton

Returns as of 03/08/2017 Returns as of 03/08/2017 Returns as of 03/08/2017 Returns as of 03/08/2017

1Y: 35%

5Y: 196%

10Y: 169%

1Y: 28%

5Y: 87%

10Y: 84%

1Y: 40%

5Y: 72%

10Y: 140%

1Y: 30%

5Y: 38%

10Y: 36%

0%

5%

10%

15%

20%

25%

2006 2008 2010 2012 2014 2016

EBIT

DA M

argi

n

EBITDA Margins by Index

System Integrators Major Subsystems Suppliers

Significant Component Suppliers Pure Play Service Providers

Source: Financial Data retrieved via Thomson Reuters

The A&D sector is financially strong, but incentivizing R&D will be key for the future 6

Source: Financial Data retrieved via Thomson Reuters

(EBITDA: earnings before interest, tax, depreciation, and amortization)

Fact-based, repeatable, iterative, and collaborative process

The Department assesses the defense industrial base by sector

Fragility and Criticality (FaC) Assessments

• Select the assessment subject and scope

• Develop the FaC matrix

• Identify Risk

• Develop Mitigation

Defense Industrial BaseSectors

Defense Industrial BaseSub-sectors

Missiles & Munitions Tactical Missiles

Missile Defense

Strategic Missiles

Conventional Ammunition

Ground Vehicles Combat

Combat Support

Combat Service Support

Space Space Launch

Satellites

Aircraft Fixed Wing

Rotary Wing

Unmanned Aerial Vehicles

Shipbuilding Submarines

Aircraft Carriers

Surface Vessels

C4I Communications

Sensors / Radars

MicroelectronicsHighMediumLow

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Data analytics and an innovative workforce are critical to the future defense industrial base

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New Analytic Platforms Future StateCurrent State

DoD recognizes criticality of A&D talent for a resilient and innovative defense

industrial base

88

Program Maturity

Strengthening DoD manufacturing capabilities across the acquisition life cycle

MIB

P Ca

pabi

litie

s

MD5 National Security

Technology Accelerator

Manufacturing Technology (ManTech)

Defense Production Act (DPA) Title III

Manufacturing USA Institutes

DPA Title I

MIBP manufacturing programs span all technology readiness levels9

TRL 1 TRL 2 TRL 3 TRL 4 TRL 5 TRL6 TRL 7 TRL 8 TRL 9

Pre-Concept ConceptRefinement

TechnologyDevelopment

Engineering & Manufacturing Development

Production & Deployment Operations & Support

Industrial Base Analysis and Sustainment (IBAS)

MIBP is DoD lead for evaluating the national security impacts of proposed transactions

Ensuring competition and protecting our most sensitive technologies

Mergers and Acquisitions, Joint Ventures, and Strategic Alliance Transactions Global Markets & Investments and CFIUS

U.S.-Based Transactions Foreign Direct InvestmentConduct DoD’s M&A analyses and facilitate regulator reviews to protect the Department’s interests in: • national security, competition, and innovation• global technological leadership• supply chain effects• financial stability and stewardship of industry

Global Markets & Investments• Analyze national security implications of

foreign investments in the United States • Proactively assess global market trends related

to the defense industrial baseCommittee on Foreign Investment in the U.S.• Review transactions that could result in

control of a U.S. business by a foreign person

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2014 CFIUS Annual Report to Congress

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50

100

150

200

2009 2010 2011 2012 2013 2014

Covered Transactions

Strengthen the industrial base that supports the Warfighter

MIBP capabilities & programs support the defense industrial base across the DoD acquisition life cycle

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Business Intelligence &

Analytics

DPA Title III

ManTech

Manufacturing USA Institutes

Industrial Base Analysis and Sustainment

Defense Priorities and Allocations

System

CFIUSIndustrial Base Assessments

Global Markets & Investments

Mergers & Acquisitions

MD5 National Security

Technology Accelerator

International Industrial Base Collaboration

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Questions?